The Securities and Exchange Commission of Pakistan (SECP) has said the stock market brokers should be well aware of the fact that Know Your Customer (KYC) and Customer Due Diligence (CDD) are becoming much more important globally for preventing identity theft, financial frauds, money laundering and terror financing.
According to an SECP order issued here on Wednesday, SECP strongly advised the securities company/Trading Right Entitlement Certificate holders to implement its CDD and KYC policy and procedures in letter and spirit, as effective implementation would safeguard it from being used for money laundering and other illegal activities. The order has disposed of the proceeding initiated through Show Cause Notice ("SCN") dated December 17, 2015 issued to a securities company ("the Respondent") under Section 22 of the Securities and Exchange Ordinance, 1969 ("the SE Ordinance").
The brief facts of the case are that the Respondent is a Trading Right Entitlement Certificate holder of Pakistan Stock Exchange Limited. The Commission received a complaint from Sonia Karim, ("the Complainant") alleging that a person with name of Armaghan Khalil has opened several fraudulent joint accounts and CDC sub accounts with Abid Karim (ie the Complainant's father) over the past one year. The Complainant informed that one of these accounts was opened with the Respondent.
In this regard, details of the account were sought from the TREC holder/respondent. Examination of the account opening form revealed that a joint account was opened by the Respondent under the name of Armaghan Khalil and Abid Karim. Further a CDC sub account was also opened in the name of Armaghan Khalil and Abid Karim by the Respondent. Review of the account opening form revealed that no Know Your Customer (KYC) and Customer Due Diligence (CDD) was conducted by the Respondent with respect to Abid Karim.
The regulation 4.18 of the Rule Book of PSX made under the SE Ordinance provides that: "The Brokers shall formulate and implement an effective Know Your Customer (KYC) and Customer Due Diligence (CDD) internal policy and framework in accordance with the guidelines issued by the Exchange, with the prior approval of the Commission and any notices or circulars issued by the Commission from time to time. The KYC and CDD policy should be approved by the Board of Directors of the Broker, if it is a Corporate Brokerage House, and must be appropriately communicated to every agents and branches of the Broker. The Brokers shall also ensure that the abovementioned policies are effectively disseminated to and understood by the relevant personnel".
Moreover, guideline 3.9 of the guidelines for brokers for developing effective KYC and CDD policies and procedures notified by the PSX on March 16, 2012 provides that:
"In general, physical presence of the account opener/authorised representative is necessary at the time of opening a brokerage account. In the case of non-resident/overseas customers or customers in other cities where the broker does not have a branch/office, more strong identity verification procedures should be applied These include verification by a reliable third party, reference of an existing customer of the broker, confirmation from another broker with whom the customer had an account, etc."
In the light of the facts, prima facie it appeared that the Respondent failed to comply with the provisions of Rule Book of PSX; therefore, the SCN was issued to the Respondent under Section 22 of the SE Ordinance.
The SECP has examined the facts, evidences, and documents on record and the written and verbal submissions made by the securities company. The securities company has committed a violation of the regulatory framework and is therefore liable to penal action under section 22 of the SE Ordinance.
The SECP has taken into account the enforcement actions initiated by the Commission against the Respondent in the past. The LCI Department of Securities Market Division has affirmed that previously no administrative action has been taken against the Respondent. The SECP has taken into consideration the assurance of the Respondent to further strengthen its KYC and CDD policies and procedures. In view of the facts stated above, in exercise of power conferred upon me under Section 22 of the Ordinance, the SECP has imposed a token penalty of Rs 50,000 on the respondent. The TREC holder is further advised to ensure strict compliance of regulatory framework, in future, the SECP order added.
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